Doug Thompson

(I’m having to write this on Tuesday, so I’m assuming the deal will pass.)

Detroit automakers are dying because they don’t produce enough efficient cars. So what do we do? Bail them out by taking the $15 billion they need short-term out of the $25 billion loan we gave them to develop efficient cars.

We cashed in Detroit’s future to salvage its present. This is the same policy we’ve pursued since the 1970s.
House Speaker Nancy Pelosi, D-Calif., will get the criticism for this. To her credit, however, she held out as long as she could. Nobody else budged. There were no other places to get the money when she finally agreed.

This $15 billion accomplishes nothing except to give Detroit a bridge loan until January, when the big Democratic Congressional majorities are sworn in.

So there we are. Businesses that are doing well, or relatively well, can’t get a loan because private credit markets have dried up. Businesses doing very poorly get billions from taxpayers.

During research for all this gloom, I ran across a phrase I’d never heard before: “Lemon socialism”.
Let’s quote Wikipedia here, since all we’re doing is defining slang: “’Lemon socialism’” is a term for the practice in supposedly free market capitalist economies in which the government steps in to bailout or otherwise subsidize weak or failing firms.

“A government attempting to transition from capitalism to socialism by this method takes control of the worst industries — the ‘lemons’ — first, which undermines such an approach. Socialists socialize the losses while capitalists keep the profits. Similarly, in post-Communist societies, nationalized industries which had the least capital with which to modernize are the last targets for privatization. The Emergency Economic Stabilization Act of 2008 has been cited as an example of lemon socialism.”

It’s an intriguing concept. Makes you wonder: When are we taxpayers going to buy up a company that makes money?

Anyway, back to cars. One of the best wrap-ups of the situation is at www.reuters.com. On Monday, Kevin Krolicki wrote an analysis piece that was straightforward and simple about General Motors.

All the $15 billion will do is keep GM from formally filing bankruptcy. The fact is that GM faces bankruptcy in all but name. Chrysler’s dead already and will merge with GM. Bond holders could be paid as little as 30 cents on the dollar. The stock will likely become worthless. Nine plants will close just at GM. Tens of thousands of jobs are doomed.

Columbia University economist Jeffrey Sachs agreed in congressional testimony last week, telling lawmakers that the automakers should be allowed to reorganize outside bankruptcy.

“We don’t need Chapter 11 filing to do a balance sheet restructuring,” Sachs said. “We can do it in the shadow of this.”

“This,” of course, means looming disaster, which allows a certain freedom of action.

There’s also going to be a large amount of government oversight of U.S.-based automakers. Leery as I am of this, even a state-run company could hardly have done any worse. To quote the president-elect: Auto companies “do not have a sustainable business model right now, and if they expect taxpayers to help in that adjustment process, then they can’t keep on putting off the kinds of changes that they, frankly, should have made 20 or 30 years ago.”

“We don’t want government to run companies,” he added. “Generally, government historically hasn’t done that very well,” a well-phrased though monumental understatement.

The economic consequences for all this are serious enough. The political consequences require some mention, however.

The devastated Republican Party will make any hay it can out of any mishandling of the automakers’ crisis.

The senior Republican member of the Senate’s banking committee is already calling the $15 billion “a bridge loan to nowhere.”
It’s fair game.

Whatever happens, one thing is clear: Detroit will not reform itself until it faces a serious threat of death. This bailout will only work if Washington — representing the rest of us — lets Detroit know there’s a limit somewhere.